What is Equity Crowdfunding and how does it work?

26 March 2018 @ 9:00AM Equity Crowdfunding Investors

What is Equity Crowdfunding and how does it work?

Equity Crowdfunding is the new way for everyday investors, mums and dads, and the millennial generation, to invest in early-stage and growth-stage businesses. Unlike platforms like Kickstarter (which gives you rewards for crowdfunding), Equity Crowdfunding gives investors part-ownership (or equity share) in a business that they help to fund.

Where traditionally, this capital raising space was dominated by wealthy individuals, venture capitalists and angel investors, now through OnMarket, everyone can handpick, gain a stake and invest in start-ups, early-stage and growth-stage businesses.

This innovative type of funding has recently been enabled in Australia by the Crowd-sourced Funding Act 2017. As seen from the successful operation of Equity Crowdfunding overseas, this disruption to the way firms can raise finance is an exciting one – the extent of Equity Crowdfunding stood at $2.5bn globally in 2015, and some companies have already raised more than £1m each in the UK. So it is clear that there is great potential in Australia, where investor interest is high and early-stage businesses are increasingly welcoming this type of funding.

What Equity Crowdfunding will mean for the investor is that anyone and everyone can now invest in start-ups and growth-stage businesses, by being able to choose companies they feel passionate about and gain part-ownership of. 

 

 

Imagine owning a piece of the next game-changing business venture or being able to invest in what might be the next Facebook of the future generation. Some companies in Australia that have raised capital so far via OnMarket include a solar-focused energy retailer that became the world's most popular equity crowdfunding deal by investors (DC Power Co.) and a company that developed an innovative, caffeine energy mouthstrip that became Australia's first equity crowdfunding deal closed (Revvies). 

One can invest as little as $50 in the hope that the value of a company will increase as the company grows in the future. The only limit to investing is the $10,000 cap per company per year for retail investors (sophisticated investors have no limit). Investors also enjoy a 5-day cooling off period after their investment in case they change their mind.

Investors should diversify their investment between different companies to minimise their risk, since investing in early-stage businesses is a high risk venture. Equity Crowdfunding is a long-term illiquid investment, so returns are gained if a company ‘exits’ through a trade sale, IPO or share buyback.

It has been said that a bank is a place that will lend you money if you can prove that you don’t need it. As such, Australian businesses usually face a lengthy and difficult process when they try to get funds from banks. Equity Crowdfunding opens up a new way to access funds easily, gain awareness amongst a large number of consumers, and gain proof that people believe in their product offering.

Nevertheless, the benefits and interest in Equity Crowdfunding is large – until recently, Australian businesses and investors have missed out on this innovative type of capital raising over the past few years as we have watched the booming Equity Crowdfunding market in the UK and USA take off. The Australian government has thankfully since caught up with the required legislative changes and OnMarket became one of the first in Australia to receive an equity crowdfunding licence. So join OnMarket and invest in businesses making an impact or visit OnMarket Crowd for more information.

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